Before the Public Service Commission of the State of Delaware, the Delaware Energy Office, the Office of Management and Budget, and the Controller General
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BEFORE THE PUBLIC SERVICE COMMISSION OF THE STATE OF DELAWARE, THE DELAWARE ENERGY OFFICE, THE OFFICE OF MANAGEMENT AND BUDGET, AND THE CONTROLLER GENERAL IN THE MATTER OF INTEGRATED RESOURCE ) PLANNING FOR THE PROVISION OF ) STANDARD OFFER SUPPLY SERVICE BY ) DELMARVA POWER & LIGHT COMPANY UNDER ) 26 DEL. C. § 1007(c) & (d): REVIEW ) PSC DOCKET NO. 06-241 AND APPROVAL OF THE REQUEST FOR ) PROPOSALS FOR THE CONSTRUCTION OF NEW ) GENERATION RESOURCES UNDER 26 DEL. C. ) § 1007(d) (OPENED JULY 25, 2006) ) FINDINGS, OPINION AND ORDER NO. 7328 BEFORE: ARNETTA McRAE, Chair JAYMES B. LESTER, Commissioner JOANN T. CONAWAY, Commissioner J. DALLAS WINSLOW, Commissioner JEFFREY J. CLARK, Commissioner and John A. Hughes, Secretary Delaware Department of Natural Resources and Environmental Control, Delaware Energy Office Jennifer W. Davis, Director Office of Management and Budget Russell T. Larson, Controller General Office of the Controller General APPEARANCES: For the Staff of the Delaware Public Service Commission: JAMES McC. GEDDES, ESQUIRE BROOKE E. LEACH, ESQUIRE Ashby & Geddes Rate Counsel BRUCE H. BURCAT, EXECUTIVE DIRECTOR MICHAEL SHEEHY, DEPUTY DIRECTOR KAREN J. NICKERSON, SECRETARY For the Division of the Public Advocate: G. ARTHUR PADMORE, ESQUIRE JOHN CITROLO JUSTIN MURPHY, ESQUIRE For Delmarva Power & Light Company: TODD L. GOODMAN, ESQUIRE, Associate General Counsel GARY STOCKBRIDGE, President MARK FINFROCK, Director of Risk Management WILLIAM MOORE, JR. GARY COHEN MARIA SCHELLER For NRG Energy, Inc.: DAVID L. DAVIS Vice President of Development NRG Energy, Inc. For Bluewater Wind LLC: THOMAS P. MCGONIGLE, ESQ. PETER MANDELSTAM, President For Conectiv Energy Inc.: I. DAVID ROSENSTEIN, ESQUIRE THE STATUTORY BACKGROUND. The EURCSA 1. In March 2006, the Delaware General Assembly introduced House Bill No. 61 (“the EURCSA”) in response to extensive consumer outrage occasioned by the announcement of imminent and significant rate increases resulting from the higher cost of fuel used to generate electricity and the shift to PJM market-based prices. The cumulative effect of these increases was felt by Delmarva Power & Light Company’s 1HB 6 is codified in the Electric Utility Retail Customer Supply Act of 2006 (“the EURCSA”), 26 Del. C. §§ 1001-1019. 2 (“DP&L” or “Delmarva”) customers at one time due to the expiration of rate freezes established with deregulation of Delaware’s electric supply industry. The purpose of the EURCSA was to spread out the impact of the rate increases and enable state agencies to explore alternative options of Standard Offer Service (“SOS”)2 procurement at reasonable and stable prices. The legislation specifically required Delmarva to develop an Integrated Resource Plan (“IRP”) and “investigate all possible opportunities for a more diverse supply at the lowest reasonable cost.” See 26 Del. C. § 1007(c)(1)b. On or before August 1, 2006, as part of its IRP, Delmarva was required to file a proposal to obtain long-term contracts, including a proposed Request For Proposal (“RFP”) for the construction of new generation resources within Delaware to serve its SOS customers. 2. The EURCSA authorized the Delaware Public Service Commission (“the Commission”) and the Delaware Energy Office (“the Energy Office”) to approve or modify the RFP terms prior to issuance. The Commission and the Energy Office were instructed to “ensure that each RFP elicits and recognizes the value of: a. proposals that utilize new or innovative baseload technologies; b. proposals that provide long-term environmental benefits to the state; c. proposals that have existing fuel and transmission infrastructure; d. proposals that promote fuel diversity; e. proposals that support or improve reliability; and 2SOS refers to Delmarva customers who do not receive their energy supply from a third-party electric provider. See 26 Del. C. § 1001(18). 3 f. proposals that utilize existing brownfield or industrial sites.” Id. at § 1007(d)(1)a.-f. The General Assembly ordered Delmarva to issue its RFP on November 1, 2006, and set December 22, 2006 as the deadline for the receipt of bids. Id. at § 1007(d)(1). 3. The EURCSA specifically directed the Commission, in conjunction with the Energy Office, the Controller General, and the Director of the Office of Management and Budget (collectively the “State Agencies”), to evaluate the proposals received pursuant to the RFP and “determine to approve one or more of such proposals that result in the greatest long-term system benefits … in the most cost- effective manner.” Id. at § 1007(d)(3). The State Agencies retained an Independent Consultant (the “IC”) to oversee development of the RFP and assist the State Agencies during the bid evaluation. I. The PROCEDURAL BACKGROUND. The Commission Opens This Docket to Review the Proposed RFP 4. Following the EURCSA’s mandate, Delmarva filed its proposed RFP on August 1, 2006. On August 8, 2006, the Commission opened this docket to perform its oversight and review tasks as set forth in the EURCSA. (PSC Order No. 7003.)3 In October 2006, the Commission and the Energy Office adopted a “big funnel” approach and developed the criteria to be included in Delmarva’s RFP that would guide evaluation of the potential bids. On December 21, 2006, Conectiv submitted a primary and alternate bid for a 180 MW combined cycle gas turbine 3For a detailed discussion of the procedural history of this docket prior to the State Agencies’ decision regarding the generation bid proposals, see pages 7-11 of PSC Order No. 7199 (May 22, 2007). 4 (“CCGT”) located at its Hay Road site in Edgemoor, Delaware. The following day, Bluewater submitted twelve variations of a bid proposal that included both 20- and 25- year terms and: (1) a 600 MW capacity plant with a 400 MW energy limit; or (2) a sale of two-thirds of the energy from a 600 MW plant. That same day, NRG submitted a proposal to sell energy and unforced capacity credits from 400 MW of a 600 MW coal-fired integrated gasification combined cycle (“IGCC”) facility to be constructed at its Indian River site. Evaluation of the Generation Bid Proposals 5. On February 21, 2007, Delmarva and the IC filed bid evaluation reports. Both Delmarva and the IC ranked the bids as follows: (1) Conectiv; (2) Bluewater; and (3) NRG. Delmarva concluded that none of the bids achieved the EURCSA’s objective because each bid was above the market forecast and produced minimal price stability. Delmarva asserted that the EURCSA’s objectives could be satisfied with demand side management (“DSM”) programs and energy purchases on the regional market. The IC scored each bid pursuant to the favorable characteristics, project viability, and economics super-categories. With respect to price and price stability, the IC concluded that all three of the bids were above market. However, Conectiv’s bid was only $1.28/MWh above market projection, while Bluewater’s and NRG’s bids were $12.01 and $15.17 MWh higher than market forecast, respectively. The IC recommended deferring a financial decision on the proposals pending Staff’s analysis of reliability and economics. The IC also suggested employing a market test to evaluate other regional options. 5 The Hybrid Energy Portfolio 6. On May 3, 2007, Staff issued the “PSC Staff Review and Recommendations on Generation Bid Proposals,” in which it recommended that the State Agencies adopt a portfolio approach to energy planning that would involve the addition of new generation assets in southern Delaware, development of DSM and energy efficiency programs, renewable distributed generation, short- and long-term bilateral contracts, and market purchases. With respect to the generation bids, Staff recommended that the State Agencies direct Delmarva to negotiate with both Conectiv and Bluewater for a hybrid energy supply that would combine a 200-300 MW offshore wind farm with a 150-200 MW synchronous condenser CCGT in Sussex County 7. On May 22, 2007, by PSC Order No. 7199 (“the Order”), the State Agencies accepted Staff’s proposed energy supply portfolio and directed Delmarva to negotiate in good faith with Bluewater for a long-term power purchase agreement (“PPA”) for the provision of wind power. The Order further instructed Delmarva to negotiate independently with both Conectiv and NRG to provide any necessary backup firm power when wind power is not available and directed that the negotiations for the backup power be conducted at the same time as the Bluewater-Delmarva negotiations. 8. In accepting Staff’s recommendations, the State Agencies explained at the outset that the EURCSA does not constrain the State Agencies to consider solely the original generation proposals submitted by the bidders. The State Agencies reasoned that the EURCSA did not contain such limiting language and that the RFP approved by 6 the Commission and the Energy Office contemplated that negotiations between Delmarva and each bidder might modify the original submissions. Moreover, the State Agencies reasoned that Staff’s recommendation was the most appropriate method of diversifying risk, taking control of Delaware’s energy future, and providing Delmarva’s SOS customers with price-stable reliable energy. Accordingly, the State Agencies found that Staff’s proposal was not prohibited by the EURCSA. 9. The State Agencies recognized that their decision to direct Delmarva to negotiate with Bluewater for a wind PPA was not the “least cost” alternative but reasoned that the EURCSA criteria did not focus solely on price. Moreover, the State Agencies observed that price was not even specifically identified in the EURCSA as a Delaware generation evaluation factor. In light of the growing uncertainties with respect to price in the current energy market, the State Agencies based their decision on factors in addition to price such as environmental considerations and price stability. In assessing the risk of relying on the current energy market, the State Agencies considered the research of several leading energy groups and consultants – including the Governor’s Cabinet Committee on Energy – advocating a portfolio approach to supply procurement.